Crisis in the euro zone: The French connection

Throughout the euro debt crisis, there has been criticism of an apparent lack of political leadership.

Critics are especially targeting the German-French engine of European integration. But that engine has broken down.

One of the reasons is that France cannot play the role of an anchor of stability. The country has its own problems and is in worse economic shape than when President Nicolas Sarkozy took power in 2007.

And then, possibly, some rescue action is looming for French banks which have been heavily exposed in the crisis countries, Greece, Portugal and Italy. That is why France’s creativity in the crisis seems to be limited.

France under threat from the euro crisis?

At this stage no one is suggesting that France’s economy - or the government’s AAA credit rating – are under direct threat from the euro zone’s problems, though the poor performance of the French stock and bond markets so far this month suggests some contagion.

However France’s debt and deficit levels remain far below those in the other countries falling victim to the crisis.

Economic growth this year is forecast at 2.2 percent, weaker that Germany; unemployment at nine percent is not going down as it is in Germany and public debt is also rising.

With a presidential election looming next year, the government of conservative leader Nicolas Sarkozy is struggling to convince voters that stubbornly high unemployment will keep falling as the economy recovers.

Indeed, the number of people without a job in France rose in May after falling for the previous four months.

Another problem is competitiveness as wages have risen sharply in recent years while productivity has not. And in contrast to Germany, France – like Italy, Spain and the region as a whole - is running a large trade deficit.

The biggest short-term worry for France is the effects of the euro zone crisis on its banks as further countries fall prey to contagion.

French banks’ exposure to Italy stood at around 270 billion euros at the end of December, according to the Bank for International Settlements. That is on top of their exposure to Greece and Portugal.

Investors’ concerns about France have been showing up in the bond market – where it is costing France more to borrow money – and in the credit market, where the cost of insuring against the possibility of Paris defaulting on its debts has risen.

In addition France will also have to bear the burden of further financial assistance to Greece, which needs a second multi-billions bailout package, and potentially others like Portugal and Ireland.

Jacques Attali: "Unless we take a step towards a little more federalism, the euro will disappear."

To look at France’s position in the euro crisis, euronews spoke to Jacques Attali.

An economist and ex-President of the European Bank for Reconstruction and Development, he now presides the PlaNet Finance non-profit organisation.

Laura Davidescu, euronews:
“Federalists like yourself have always said the euro cannot survive without more economic and political integration. Do you think the French government, President Sarkozy, agrees?”

Jacques Attali:
“Unless we take a step towards a little more federalism, the euro will disappear. It is not about being federalist or anti-federalist. It is a matter of fact. Europe will not survive without a rather more consistent federal budget, because a European budget does already exist…..”

euronews:
“And do you think this position is understood today within the French government?”

Jacques Attali:
“France has always been at the forefront of European construction. Today you can hear extremely conflicting points of view in France:

“You have the whole Socialist opposition which supports the issuing of euro bonds and a bigger step towards a much stronger European Union. This
view can also be heard in elements within the governing party;

“Then you have people who are hostile to even keeping the euro.

“And then you have a sort of, lets say, realistic alliance between part of the French government and the French banking system, which are extremely closely tied. They are exchanging information, ideas, plans, even openly putting joint projects between French banks and the French government on the table which is really a first in the history of international diplomacy.And we can see that these proposals are aimed at trying to square the circle, that means both protecting the banks and enabling Greece to survive. But it seems to me that these proposals are, at some point, going to lack long-term vision.”

euronews:
“Yes, well where can we find this long-term vision? There was a time when France was in Europe’s political driving seat and Germany was Europe’s economic engine. If we look at today’s Franco-German tandem, it is very unbalanced in favour of Germany.”

Jacques Attali:
“France remains, by far, Europe’s main military power. France remains, by far, the leading economic power in a large number of sectors and there is a lot of unemployment in Germany. Germany has many difficulties. France also remains the top demographic power.”

euronews:
“But you are contradicting the dominant opinion, which says Germany is the economic powerhouse of Europe.”

Jacques Attali:
“I don’t care. I am telling you that Germany is the sick man of Europe. We will see it in 20 years time because a nation’s weakness can be measured essentially by its demography and its ability to think of a long term strategy. Germany does not have a long term strategy.

“The French look at that with a certain… caution. They don’t want to antagonise the Gemans, and this is fundamental from a French point of view.

“It is all about moving closer to European federalism but without putting the Germans in a position to oppose it, rather trying to make our German friends understand that it is in their interest to make progress towards European federalism.

“If the crisis should explode, if Greece, as bad luck would have it, should have to leave the euro, if Spain or Italy had to do the same, the euro would rise really high. It is already too strong and Germany, which founded its development model entirely on exports and not at all on the domestic market, would be in a tragic situation.”